Jane is one such investor. Looking for a combination of steady income and the potential for capital growth, she recently purchased a portfolio of shares in major companies with a good history of paying regular dividends. Soon she’ll begin to enjoy receiving dividends and she’s already following the performance of her shares via daily finance reports. But how will her investment income be taxed?
Each time Jane receives a dividend statement from a company (usually twice a year), she’ll see that the cash amount of her dividend is made up of a franked amount and an unfranked amount. There will also be a franking credit (imputation credit) that represents tax already paid by the company. In her annual tax return, Jane must declare the cash dividend plus the franking credit. This total amount is then taxed at her marginal rate, but reduced by the value of the franking credit.
For example: BigBank Ltd (BBL) pays Jane a fully franked dividend of $70. The imputation credit is $30, and the unfranked amount is nil. Jane declares the full $100 on her annual tax return, and at her marginal rate of 39% (including Medicare Levy) this creates a tax bill of $39. However, this is reduced by the franking credit – the tax already paid by BBL – so she only pays an additional $9 in tax.
A capital gain will be realised if Jane sells any shares for more than she paid for them. If the shares have been held for less than 12 months Jane will need to declare the full profit in her annual tax return and it will be taxed at her marginal rate plus Medicare levy.
If the shares have been held for more than 12 months a 50% discount applies to capital gains tax, so Jane only needs to declare half of her profit.
If Jane sells any shares for a loss, it can be offset against current capital gains, or carried forward indefinitely and offset against future gains.
In the example above Jane has invested in her own name and her portfolio will feel the full drag of being taxed at her marginal rate. More tax means less money available to generate a return.
Jane could therefore consider investing via superannuation. Super funds in the accumulation phase have a tax rate of just 15%, and the discounted tax rate on capital gains on assets owned for more than 12 months is 10%. Of course, Jane would need to be happy to have her nest egg locked up in super until she meets a condition of release, potentially decades away.
Unusual economic conditions are seeing more people invest in assets that they may be unfamiliar with. Success means understanding how these investments work, their specific risks, and the tax implications. Your licenced financial planner can help you identify your needs and design a plan of action to help you make the most of your investment dollars.